c. Treatment of nonprofit insurance providers Present Law Present law (as amended by the 1986 Act) provides that an organization described in sections 501(c)(3) or (4) of the Code is exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. For this purpose, commercialtype insurance generally is any insurance of a type provided by commercial insurance companies. The 1986 Act did not, however, alter the tax-exempt status of an ordinary health maintenance organization (i.e., any health maintenance organization, tax-exempt under prior law, which is substantially the same as a Federally chartered health maintenance organization), that provides health care to its members predominantly at its own facility through the use of health care professionals and other workers employed by the organization. Present law also provides special treatment for existing Blue Cross or Blue Shield organizations and other organizations that meet certain requirements and substantially all of whose activities are providing health insurance. Generally, such organizations are treated as stock property and casualty insurance companies. A special deduction is provided to such organizations with respect to their health business equal to 25 percent of the claims and expenses incurred during the taxable year less the adjusted surplus at the beginning of the year. In addition, such organizations are given a fresh start with respect to changes in accounting methods resulting from the change from tax-exempt to taxable status. Further, such organizations are not subject to the treatment of unearned premium reserves generally applicable to property and casualty insurance companies. Finally, the basis of assets of such organizations is equal, for purposes of determining gain or loss, to the amount of the assets' fair market value on the first day of the organization's taxable year beginning after 1986. Possible Proposals 1. The special deduction for existing Blue Cross/Blue Shield organizations could be repealed. 2. The tax exemption for health maintenance organizations (HMOs) could be repealed. 3. Health maintenance organizations could be given the same treatment as existing Blue Cross and Blue Shield organizations (i.e., they would not be entitled to tax-exempt status, but they would be eligible for the special Blue Cross/Blue Shield deduction). Pros and Cons Arguments for the proposals 1. Health maintenance organizations commonly are structured so that their operation is essentially equivalent to providing insurance coverage for medical expenses, and it is unfair to give them more favorable tax treatment than other providers of health insurance coverage. 2. Continuing exempt status for health maintenance organizations gives them an undesirable competitive advantage, not only over taxable insurers providing comparable coverage of medical expenses, but also over taxable health service providers providing similar medical services. 3. The special 25-percent of claims expense deduction for Blue Cross/Blue Shield organizations creates a competitive advantage for the health insurance business of these organizations compared to the health insurance business of other insurance companies. Arguments against the proposals 1. Health maintenance organizations are service providers as well as insurers, and taxing them on the grounds that they operate in a manner equivalent to insurers is unfair. 2. Taxing health maintenance organizations like insurance companies would in many instances prove administratively cumber some. 3. Taxing health maintenance organizations, even if they are given special tax advantages, contravenes Congressional policy to promote that form of providing health services or coverage by granting the provider organizations tax-exempt status. 4. Existing Blue Cross/Blue Shield organizations typically provide health insurance coverage to individuals and small groups who might not otherwise be able to purchase such coverage from other insurance companies. A significant increase in the tax liability of such an existing Blue Cross/Blue Shield organization might force the organization to drop this special coverage. d. Treatment of foreign life insurance companies Present Law In the case of a foreign life insurance company, present law requires that income effectively connected with the conduct of an insurance business in the United States be increased by an imputed amount to the company, if its surplus held in the United States is insufficient in relation to a percentage of its total insurance liabilities on its United States business. The effect of this imputation rule is to prevent foreign companies from artificially reducing the amount of investment income subject to tax in the United States. Under the imputation rule, if the required United States surplus exceeds the company's actual United States surplus, the company must increase its income by the product of that excess and its current investment yield on assets held in the United States. For purposes of this calculation, a company's surplus held in the United States is the excess of its assets held in this country over its total insurance liabilities on United States business. Some foreign life insurance companies may have been seeking to avoid the effect of the provision by incurring large, short-term noninsurance liabilities at the end of the year. This practice (e.g., borrowing a large sum for a short period such as a week) could have the effect of increasing assets by the borrowed amount without any corresponding increase in insurance liabilities. In addition, a company may seek to avoid the provision by holding assets in the United States that have a low current investment yield and substantial unrealized appreciation, which has the two-fold effect of increasing United States assets (which, in the case of real property and stock, are valued at market value), and decreasing the current investment yield on those assets. Possible Proposal The imputation rule could be clarified to provide that it take into account the excess of a company's United States assets over its total United States liabilities, not just its insurance liabilities, and that unrealized appreciation in the assets is not taken into account. In addition, the investment yield taken into account could be the investment yield on all assets of the entire company, so that the selection of low-yielding assets to hold in the United States would be irrelevant. Alternatively, the investment yield on United States assets could take into account in determining the amount of any unrealized appreciation in the assets during the year. Arguments for the proposal Pros and Cons 1. The proposal eliminates possible loopholes that would make the imputation provision avoidable at will. 2. The proposal cuts back an unintended and unfair competitive advantage that foreign life insurance companies insuring United States risks have over purely domestic companies insuring such risks. Arguments against the proposal 1. The proposal could discourage foreign life insurance companies from insuring and reinsuring United States risks and, thus, could make life insurance scarcer and more expensive in the United States. 2. The proposal could prompt foreign jurisdictions to take retaliatory measures against United States insurers operating abroad, and, thus, could hurt United States international competitiveness as well as disrupting international insurance and reinsurance markets. |